Sales Force Compensation: Challenges of Growth
July 23, 2012
Finding the best sales force compensation structure for expansion stage technology companies
Sales force compensation is a very challenging and sensitive topic to broach from any number of angles. To people outside of or not familiar with the sales profession, there is unfortunately too much stereotyping of sales compensation as over the top, condoning aggressive sales tactics, and out of touch with the rest of the company’s compensation structure. Within the sales profession and management executives, there is constant debate around the right compensation structure as a mixture of performance-based commission versus base salaries.
To date, most of the literature and research out there typically focus on two types of organizations:
- Mature organizations or organizations in mature markets with a sizable, established sales force. For them, the challenges are most acute in maintaining and improving sales productivity through fine-tuning and continuously adapting the sales compensation structure.
- Innovative, one of a kind companies with a new business model or compensation structures that either go against the common wisdom or have some novel characteristics. For these companies, the key challenges will be how they will sustain these models as the company matures and starts having to fend off competitors and copycats.
I find that there is still not a lot of great case studies or discussions around a special set of companies that are of most interest to us at OpenView — fast growing, expansion-stage technology companies. From our experience, these companies are typically at a point where they have a good product, have found a proven market that accepts that product, but need to rapidly ramp up their sales force to capture a broader market and create enough momentum to take them to the next level.
Of course, to do this well it requires a combination of great management leadership, judicious strategy, and a receptive, growing marketplace. But sales execution and sales force growth and motivation, in particular, is one of the key differentiators for companies in this stage.
We see three distinct sets of challenges around sales compensation, which I shall discuss briefly here and explore further in upcoming articles:
- Compensation for a sales force that is selling both very large deals and much smaller deals, when the sales force is not large enough to be segmented by deal size/market. This is very common with companies selling infrastructure software, which can be used by small technology customers or major corporations. There is always a balance to be made between encouraging sales people to hunt the large but risky “elephants” while at the same time ensuring that the company still has sufficient coverage of bread and butter smaller deals, as these deals help ensure a more predictable stream of new revenue.
- Compensation and cost planning for a sales force that is growing rapidly on the company’s momentum in the market. On the one hand, sales costs can quickly become uncontrollable if the company does not master the sales learning curve and plans to add / promote its sales people appropriately. A deep analytics challenge that arises in this situation is to understand how much of the growth is dependent on marketing investment as opposed to sales efforts, separately from the market’s organic growth.
- Retention and promotion of the top early sales persons. It is not clear how fast growing companies should compensate their top sales people, who typically account for an outsized proportion of their deals. Promoting an early top sales person into a managerial role (like a VP) risks hurting short-term sales productivity, increasing their commission risks outpacing the company’s growth, and granting of options reduce the pool for future senior management hires. Making these decisions harder is the fact that the first few successful salespeople tend to be the Jacks of all Trades — renaissance salespersons whose versatility tempts the management to rely on them more and more.
In the next few blog posts, I will explore these challenges and how companies are addressing them, hopefully bringing out some interesting insights that will help sales management design more effective compensation strategies for fast growing companies.